Debate over Core Government Functions in Pennsylvania

It is not just in Greece or California that government has spent itself out of control. Virtually every country in the EU, and every state in the U.S., has a serious spending problem, and the problem is always of the long-term kind. As I have explained on numerous occasions, growth in government did not start yesterday. A good example of this is Pennsylvania, a state with a long-term punitive-tax problem and a morbidly obese government: from 2008 to 2011 (preliminary numbers) state spending increased by $11.4 billion, or 19.4 percent.

This has started a debate in The Keystone State over the core functions of government. So far, the debate does not seem to have reached the hallowed halls of the legislature, nor the office of Governor Corbett. However, he still has time to come around on that issue. He succeeded the notorious spend-as-you-go Governor Rendell, and has started off his tenure with at least a nominal acknowledgement of the need to rein in state spending. He is continuing an effort made by his predecessor and the state legislature at keeping the General Fund (a.k.a., “operating budget”) flat. As the Central Penn Business Journal (CPBJ) reports, he his getting kudos for this from at least parts of the Pennsylvania business community:

The Lancaster Chamber of Commerce Industry supports Gov. Tom Corbett’s approach to the state budget, according to a position statement the organization released this morning. The chamber “supports the governor’s commitment to strengthen the financial foundation of our state government” through “aligning the state’s resources with the core functions and priorities of government,” the statement said.

That’s a bold statement. There are no structural spending reforms in the Corbett budget, i.e., no efforts to rein in the structural spending drivers such as Medicaid, welfare, public education and other entitlements. Instead, the governor takes a cheese slicer and cuts away a margin from all spending programs.

Nevertheless, he is at least interested in trying to keep government from running amok on taxpayers. This is a good start if you want to talk about the core functions of government. Back to the CPBJ:

As in previous years, the chamber declined to comment on specific budget provisions. Instead, it called for broad changes it said would improve Pennsylvania’s business climate, including reform of business taxes, unemployment insurance, prevailing wage and the state pension system. In a separate position paper on the education budget, the chamber reiterated its calls for pension and prevailing wage reform and also called for two-year budgeting and for permitting school districts to furlough staff for budget reasons.

This is all surface scratching and, obviously, no principled discussion about what government should and should not do. That is where the Lancaster Chamber of Commerce needs to get, because the only way to make sure a budget fits within the ability of taxpayers to pay for it, is to rein it in by principles, not spending cuts. One intermediate measure is to tie the spending growth parameters to the growth parameters of personal income. Almost all taxes are paid out of personal income – in addition to income taxes, we pay sales, use and property taxes out of current earnings. These represent approximately 90 percent of the revenues that go into the Pennsylvania state General Fund. If government spending grows faster than personal income, and does so over several years, then the state government creates an obvious need to raise taxes over time.

The Lancaster Chamber of Commerce misses out on this point. That is understandable, since they are only concerned with the current budget, but it would be a good idea for them to take a look at the longer perspective of state spending. This would help them understand that even though the governor wants to cut business taxes by $275 million, the relief is in all likelihood going to be temporary.

Fortunately, the long-term, core-functions perspective is addressed in a new report by the Commonwealth Foundation, one of Pennsylvania’s two free-market think tanks:

Total Pennsylvania state government spending has consistently outpaced the growth of personal income. From 1970 to 2011, the state operating budget as a percent of Pennsylvanians’ personal income grew from 8.8% to 12.0%. Per family of four, total state spending grew by more than $12,000 in inflation-adjusted dollars since 1970.

This is precisely the kind of comparative analysis of state spending that I have been promoting on this blog! I am happy to see that my fellow freedom fighters in The Keystone State have picked up on this. I am especially happy to see this given that I recently had to reprimand the good folks at the Commonwealth Foundation for endorsing an addiction tax that would increase government revenues.

Back to their report on state spending: 

State and local taxes take more than 10% of Pennsylvanians’ income—$4,400 per person. Pennsylvania has the 10th highest state and local tax burden, up from 24th in 1990. … Despite the dramatic growth in state government spending, Pennsylvania ranks among the worst states in the nation in key economic performance indicators. From 1991-2011, Pennsylvania ranks 41st in job growth, 46th in population growth, and 48th in personal income growth. From 2000 to 2010, Pennsylvania’s private sector lost 103,700 jobs, while government employment grew by 33,400.

Again, good analysis. This means that in 2000 every 1,000 private employees in Pennsylvania had to support 125 state and local government employees; in 2010 that number had increased to 132 per 1,000. This is a long term growth trend in virtually every state, temporarily interrupted in 2011 as the stimulus money tapered off, something that the CF report mentions briefly. They then go on to explain:

Over the last 20 years, the percentage growth of state government spending has a negative relationship with total job growth in Pennsylvania. According to IRS data, Pennsylvania lost a net 77,184 taxpayers to other states from 2000 to 2010. This out-migration resulted in a net loss of $4.3 billion in household income.

I have previously reported a marginally higher outbound migration loss for Pennsylvania, but that is beside the point. The message to Pennsylvania’s governor and legislators is clear: get your act together, rein in spending, shrink government permanently and put the promotion of economic freedom at the top of your agenda. The Commonwealth Foundation has some ideas of their own, baked together as a Taxpayer Protection Act, which would:

Limit future growth in state and local government spending. Government spending increases would be limited to the rate of inflation plus population growth. Require the prioritization of spending by government. Funding for core government functions will be more than sufficient.

This is a great idea so long as the CF is also ready to take the fight with the legislature over what the core functions of government are. I, for one, suggest that those functions are limited to what is permitted under Robert Nozick’s minimal state, and what is permissible under the strict definition of macroeconomic uncertainty. I am eagerly awaiting a proposal from the hard-working people at the Foundation.

Ensure a prudent Rainy Day Fund. 25% of excess taxes collected would be placed into a Rainy Day Fund that can be used to balance the budget in times of recession.

The thinking behind this point is that the state will continue to have spending that varies pro-cyclically, i.e., increases when tax revenues go down, and vice versa. This however means that a considerable part of state spending has to come in the form of entitlements. Since the CF also wants government to concentrate on its core functions, this implies that the CF wants entitlements to be part of the state’s core functions. I disagree – entitlements violate Nozick’s elaborated Lockean principle of justice in acquisition. But at least the Foundation is making a concerted effort in the right direction.

Provide tax relief for families. 75% of all excess state tax revenues will be used to reduce Personal Income Tax rates. After the Rainy Day Fund reaches 5% of spending, all excess revenues will be used to reduce tax rates.

OK, let’s stop there. I am wondering what part of state spending the CF is focusing on. Pennsylvania has been taking enormous amounts of federal funds over the past few years. Between 2008 and 2011 the federal share of total state spending increased from 31 to 43 percent. According to the preliminary numbers from the National Association of State Budget Officers, Federal Funds are now bigger than the General Fund in Pennsylvania. This means that if the Commonwealth Foundation is placing its fiscal restrictions – the Taxpayer Protection Act – on General Fund spending only, then state legislators will do what their peers in Colorado did after Colorado passed a similar measure 20 years ago: they just shifted spending away from the General Fund, into the Other Funds. They also asked for more and more Federal Funds. The end result is a state budget that is growing just as fast (Colorado state spending has been growing at the same pace after TABOR was passed as it did before its enactment) but with less control and influence from the state’s own taxpayers.

I am happy to see that the Commonwealth Foundation is ramping up its efforts to fight for less government spending. I hope their next step will be a clear, indisputable definition of core government functions. It is a debate that we need to take everywhere, but Pennsylvania is of course a nice place to start.